Strategic Management Accounting

This document discusses the importance of Activity Based Management (ABM) in achieving operational effectiveness in business organizations. It explores how ABM can improve performance, identify problem areas, and strengthen areas of strengths. The document also highlights the use of ABM in different types of organizations and its role in quality management and environmental sustainability.

Running head: STRATEGIC MANAGEMENT ACCOUNTING
Strategic Management Accounting
Name of the Student:
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STRATEGIC MANAGEMENT ACCOUNTING
Executive summary:
Business entities use financial and nonfinancial resources available in their disposal to achieve
certain objectives. One of the primary objectives of business organizations is to maximize the
wealth of the shareholders by increasing their profitability from business operations.
Determining the profitability of each and every aspect of business by increasing the existing
strengths of the business and improving on the area of weaknesses is contemplated in Activity
Based Management (ABM). The huge importance of ABM in achieving operational
effectiveness in each and every aspects of business is discussed in this document. Importance of
ABM in modern business world can be understood from this document, especially in the modern
day and age of cutting throat competition where profitability is the only yardstick to measure
success of business organizations.

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Contents
Executive summary:........................................................................................................................1
Introduction:....................................................................................................................................3
Activity based management:............................................................................................................3
Identification of problem areas within an organization:..............................................................4
Identification of particular areas of strengths within an organization:........................................4
The usefulness of the system is in its scope as each and every type organization can use ABM
to improve its performance:.........................................................................................................4
Use of activity based management to ensure quality management and sustainability of
environment:....................................................................................................................................7
Environment sustainability:.........................................................................................................8
Conclusion:....................................................................................................................................11
Recommendation:..........................................................................................................................11
References:....................................................................................................................................12

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Introduction:
In order to determine the performance of each aspect of a business Activity Based Management
is used. It is mainly used to determine the ability of each aspect of a business to earn profit from
their specific operations. A business organization has number of separate aspects that are either
divided in different departments or in different branches or in different processes or in different
units. In order to assess the performance of each of these different segments of business ABM is
very useful. The objective of assessing the performance and profitability of different segments of
a business is to identify the strengths and weaknesses in different aspects of business. Using the
information from ABM necessary improvements shall be made to the areas of weaknesses in
addition to further strengthen the area of strengths. Discussion on the topic of Activity Based
Management in this document shall be helpful in understanding the sheer magnitude of the topic
and its importance in modern business environment.
Activity based management:
As already mentioned that in simple term ABM is system in the hands of the management
personnel to be used to appraise the profitability of each and every aspect of a business. In order
to ensure quality management within an organization it is important that each segment of the
organization performs at their optimum level. Total quality management is achievable only when
each segment of the business will work at their optimum levels. Standard procedures mentioned
in a compilation known as ABM shall be used to ascertain the profitability of each of these
segments to determine the steps to be taken in the future to improve the functioning and
operations of each of these segments (Baran, 2013).

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Identification of problem areas within an organization:
As already mentioned at the beginning that the objective of ABM is to improve the performance
different segments within an organization. Thus, firstly it is important to identify the problematic
areas within the organization, i.e. areas which are relatively weak within the organization as
compared to other areas of the business. ABM shall help in identification of such problematic
areas to take necessary steps to improve these areas within the business. The relatively weak and
problematic areas once identified need to be improved by taking appropriate steps to ensure
better performance of the segment of business is the main objective in this section (Özkan &
Karaibrahimoğlu, 2013).
Identification of particular areas of strengths within an organization:
The important thing in ABM is that it does not stop with identification and improvement of weak
and problematic areas and segments in a business. Instead ABM is used to identify the areas
which are relatively strong within the business. The motive is to further improve these areas of
strengths within the organization. Total quality management is about ensuring that each and
every segment within a business is working to their full potential. Thus, the use of ABM is not
only made to identify and improve the weak and relatively problematic areas but also to identify
the area of strengths to further improve these segments and areas within the business to ensure
that the whole business is moving towards optimum utilization of its capacity (Gorączkowska,
2018).

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The usefulness of the system is in its scope as each and every type organization can use
ABM to improve its performance:
The nature of ABM is such that it can be used in each and every type of organization. Thus,
whether it a manufacturing entity or a service provider or for that matter an entity involved in the
business of construction, the usefulness of ABM is immense.
Manufacturing entities:
In manufacturing entities Activity Based Management is used to ensure that from procurement
department to the production department each and every segment is using their resources
effectively to contribute to the achievement of overall organizational objective of the
manufacturing entity. ABM verifies the procurement procedure to ensure that required quality of
materials are procured at lowest possible price to reduce the overall cost of procurement. On the
other hand the production department is using the materials, power and energy at optimum level
to ensure that the production cost is minimum. Apart from that ABM also ensures that the
production facilities are never stopping and continuously supplying the finished goods required
for the market. Similarly, the efficient use of labor force has to be accomplished by using
different strategies under ABM (Hoozze & Hansen, 2014).
Service providers:
In case of service provider organizations ABM will be extremely beneficial in identifying the
services and functions which are not profitable for the organization along with reason for the
same. Ensuring efficient and effective utilization of financial and non-financial resources by
introducing total quality management is possible with the help of ABM. In service provider
organizations the major portion of total costs are spent on the human resources, i.e. on

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professionals, experts, officers, employees and other workers. Ensuring that the human resources
are correctly utilized in the business operations of a service provider is key to the successful
achievement of organization objective. In case of inefficient utilization of human resources,
standard procedures of ABM shall identify the reasons for such inefficiency. Once the reason is
identified then necessary actions shall be taken to deal with problem to improve efficiency in
utilizing the human resources within an organization. High labor turnout ratio, proportionately
high idle time compared to total available labor time are clear indication of ineffective use of
human resources. ABM shall be helpful in dealing with the situation to improve the efficiency of
human resources within an organization to improve the efficiency of business operations
(Huynh, 2013).
Non-profit organizations:
As already mentioned that the nature of ABM is such that any organization can use the system
with the objective to improve the performance of different segment within an organization. It is
mainly because the objective of ABM is to improve the operational efficiency and effectiveness
of each and every segment within an organization. Thus, even for non-profit organization such as
schools, colleges, universities, hospitals and other non-profit oriented organizations to improve
the functions and operations of different segments within such organizations to achieve
objectives with which these organizations have been established.
Government agencies:
Government agencies such as different regulatory departments, income tax agencies, other
administrative departments etc. are mainly responsible to administer matters such as tax
collection in the country, maintaining general law and other situation in the country. ABM shall

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be helpful in identifying the areas of weaknesses within these organization to improve their
operations. For example tax collection department’s expenditure to collect tax can be reduced by
total quality management. Similarly, the operational efficiency of the police department can be
improved by better management of human resources. Both of these improvements are possible
with the help of total quality management under ABM (Larson & Kerr, 2007).
Use of activity based management to ensure quality management and sustainability of
environment:
The concept of quality management is dependent on the theory that an organization should be
able to maximize its output by utilizing its available resources in activities and business
operations. The concept of total quality management and its objective can be understood from
the following diagram.

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An organization mainly has three types of resources, these are labour, physical and material.
Ensuring optimum utilization of these resources is possible with introduction of total quality
management within an organization. Implementation of total quality management within an
organization is possible with the use of ABM (Mositeer, 2017).
Total quality management is a process that works within an organization on continual basis to
identify, reduce and eliminate errors and anomalies in manufacturing process; implementing an
effective supply chain management by stream lining the same; enhancing the satisfaction of
customers by improving their experiences; Ensuring effective utilization of labor force by
providing them proper training. Holding each and every party to the production process
accountable to improve the overall quality of production is defined as total quality management.
Often mistaken as six sigma it is important to state here clearly that total quality management
(TQM) is different from six sigma. TQM mainly concentrates on eliminating errors in internal
processes and functions unlike six sigma that mainly looks to eliminate and reduce defeats.
The focus of TQM is to improve the quality of final product or services of an organization as the
case may be by using a structured approach. The final output, goods or services, are improved
with the implementation of TQM within an organization. The improvement in final outputs are
possible by continuous improvement in the internal processes within an organization with the use
of TQM.
Thus, the Activity Based Management that looks to identify weaker areas within an organization
to improve the same is an enabler for implementation of Total Quality Management within an
organization as the objective of both are in alignment with each other ("Positive Views of Unions
and Business on the Rise", 2017).

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Environment sustainability:
An entity requires number of different resources to conduct its operations. These resources
include financial, non-financial and natural resources. Natural resources are available from the
environment are often scarce in nature and cannot be reproduced. Thus, it is the responsibility of
an organization to use effective methods to reduce the wastage of such resources for
conservation in the future. Conservation of natural resources will be possible by taking
appropriate steps in the right direction. Activity based management and quality management will
help an organization to improve its ability to use all resources including the resources providing
by the environment in the form of natural resources (Safari, 2016).
ABM will improve each and every facets of business operations by identifying the weaker
segments within business as well as further strengthening the stronger segment of the
organization. How ABM can improve the environment sustainability in different organizations is
enumerated below.
Entities operations and environment sustainability:
Manufacturing entities use number of natural resources that directly affects the environment and
its sustainability. Use of natural gas, petroleum, oil and other such resources in the
manufacturing processes will be improved significantly with the help of ABM. As a result the
wastage of these resources will reduce significantly to benefit the environment as a whole. These
are resources which cannot be produced hence, conservation of these resources is very crucial to
the sustainability of the environment. By identifying the areas where the natural resources are

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being wasted the management can take necessary steps to improve these areas to ensure optimum
utilization of natural resources.
Use of technology and innovations:
ABM promotes utilization of advanced technology and innovation to improve the productivity of
different resources. By utilizing such technology it would be possible to reduce the wastage of
natural resources as well as making optimum use of natural resources in the production process
to contribute to the concept of environment sustainability.
Also manufacturing enemies often discharge harmful wastes and garbage that generates from the
production process. These have significantly harmful effects on the society. Using advanced and
sustainable technology will help a manufacturing entity to reduce the harmful effects of such
production waste and garbage. Thus, ABM that promotes use of advance technology completely
aligns with the concept of sustainable environment (Askarany, 2011).
Reducing harmful effects of production on the environment:
ABM procedures improves the production and manufacturing processes of an organization by
improving the weaknesses in the process. This results in better use of resources within an
organization. The harmful effects of production and manufacturing processes is reduced
significantly by the effective use of technology and innovation. It is however, important to note
that the use of advanced technology will increase the cost of operations initially however, once
the new technology is properly implemented the overall benefits will outweigh the costs of new
technology and innovation (Vetchagool, Augustyn & Tayles, 2018).

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Use of new and improved production process to reduce the material and other resource
requirements:
Scientists are continuously looing to innovate new and better production methods to improve the
quality of products as well as reduce the raw materials and other resources required for
production. Using new and improved production process will be helpful in reducing the
resources required for production of particular quantity of product. This will also contribute to
the environment sustainability.
Recycling:
ABM has specifically talked about the importance of recycling where resources are recycled.
Recycling process has reduced the wastage in addition to improving the productivity of
resources. The biggest beneficiary of recycling is environment with reduction in wastage of
resources has reduced significantly (A., 2012).
Conclusion:
Discussion in the document indicates the huge significance of Activity Based Management and
Total quality Management in the operational efficiency of each and every type of organization.
Irrespective of nature of operation an organization carries the importance of ABM to the
organization is beyond any doubt. Thus, it is important to consider the impact of using ABM in
an organization before correctly implementing the same within the organization.
Recommendation:
Business, non-business, profit oriented, not for profit organizations, government agencies etc. all
shall be immensely benefitted by implementing Activity Based Management. Thus, necessary

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steps shall be taken by management to implement ABM to improve each and every aspects of
business operations.

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References:
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JOURNAL OF BUSINESS MANAGEMENT, 6(33). doi: 10.5897/ajbm11.2810
Askarany, D. (2011). Interaction between Target Costing and Activity-Based Costing: Is Target
Costing a True Costing Technique?. SSRN Electronic Journal, 5(9), 17. doi:
10.2139/ssrn.1888824
Baran, M. (2013). Knowledge Management in Organizations. The Case of Business
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Gorączkowska, J. (2018). The impact of business support organizations on the innovative
activity of Lubusz industrial enterprises. Management, 22(1), 85-100. doi:
10.2478/manment-2018-0007
Hoozze, S., & Hansen, S. (2014). A Comparison of Activity-Based Costing and Time-Driven
Activity-Based Costing. SSRN Electronic Journal, 2(4), 12-37. doi: 10.2139/ssrn.2489118
Huynh, T. (2013). Integration of Activity-Based Budgeting and Activity-Based
Management. International Journal Of Economics, Finance And Management
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Larson, P., & Kerr, S. (2007). Integration of Process Management Tools to Support TQM
Implementation: ISO 9000 and Activity-based Costing. Total Quality Management &
Business Excellence, 18(1-2), 201-207. doi: 10.1080/14783360601053434

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Mositeer, S. (2017). Project Management Phases in Charity Based Organizations. IOSR Journal
Of Business And Management, 19(03), 82-86. doi: 10.9790/487x-1903018286
Özkan, S., & Karaibrahimoğlu, Y. (2013). Activity-based costing approach in the measurement
of cost of quality in SMEs: a case study. Total Quality Management & Business
Excellence, 24(3-4), 420-431. doi: 10.1080/14783363.2012.704286
Positive Views of Unions and Business on the Rise. (2017). Management Report For Nonunion
Organizations, 40(4), 8-8. doi: 10.1002/mare.30262
Safari, M. (2016). Dimensions of Knowledge Management and Its Impact on the Effective
Outcomes of Innovation in Iranian Organizations. Account And Financial Management
Journal, 2(4), 13. doi: 10.18535/afmj/v1i7.05
Safari, M. (2016). Dimensions of Knowledge Management and Its Impact on the Effective
Outcomes of Innovation in Iranian Organizations. Account And Financial Management
Journal, 2(4), 13. doi: 10.18535/afmj/v1i7.05
Vetchagool, W., Augustyn, M., & Tayles, M. (2018). ISO 9000, activity based costing and
organizational performance. Total Quality Management & Business Excellence, 2(4), 1-24.
doi: 10.1080/14783363.2018.1549938

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